W O R K I N G P A P E R2 0 1 5 : 3 6

Moral Capitalin the Twenty-First Century

Zoltan J. Acs

 

 

 

 

 

 

 

Working Papers Series from Swedish Entrepreneurship Forum In  2009  Swedish  Entrepreneurship  Forum  started  publishing  a  new  series  of  Working  Papers.    

These  are  available  for  download  on  www.entreprenorskapsforum.se,  and  are  part  of  our  

ambition  to  make  quality  research  available  to  a  wider  audience,  not  only  within  the  academic  

world.  

 

Scholars  from  different  disciplines  are  invited  to  publish  academic  work  with  the  common  

denominator  that  the  work  has    policy  relevance  within  the  field  of  entrepreneurship,  

innovation  and  SMEs.  

 

The  working  papers  published  in  this  series  have  all  been  discussed  at  academic  seminars  at  the  

research  institution  of  the  author.  

 

ABOUT SWEDISH ENTREPRENEURSHIP FORUM

Swedish  Entrepreneurship  Forum  is  the  leading  Swedish  network  organization  for  generating  

and  transferring  policy  relevant  research  in  the  field  of  entrepreneurship  and  small  enterprise  

development.    

Swedish  Entrepreneurship  Forum  is  a  network  organization  with  the  aim  

• to  serve  as  a  bridge  between  the  small  business  research  community  and  all  agents  

active  in  development  of  new  and  small  enterprises.  

• to  initiate  and  disseminate  research  relevant  to  policy  in  the  fields  of  entrepreneurship,  

innovation  and  SME.  

• to  offer  entrepreneurship  researchers  a  forum  for  idea  sharing,  to  build  national  and  

international  networks  in  the  field  and  to  bridge  the  gap  between  research  and  practical  

application.    

Find  out  more  on  www.entreprenorskapsforum.se  

1

Moral

Capital

in the Twenty-First Century

Zoltan J. Acs Department of Management

London School of Economics London, WC2A 2AE

z.j.acs@lse.ac.uk

July 2015

Abstract: This paper recasts Piketty’s Capital in the Twenty-First Century in light of Acs’ Why Philanthropy Matters: How the Wealthy Give and What It Means for Our Economic Well-Being. Philanthropy matters in this debate because, as moral capital, philanthropy offers an alternative solution to the Piketty conundrum, and it does so without relying exclusively on a wealth tax and government intervention. Moral capital over the centuries strengthened both capitalism and democracy by investing in opportunity (slavery, suffrage and civil rights), which in turn leads to long-term economic growth and greater equality. By focusing on university research—which is critical in promoting technological innovation, economic equality, and economic security—that creates a large, well-functioning middle class (The Economist, March 2015), moral capital represents the missing link in the theory of capitalism development. Keywords: philanthropy, competition, education, opportunity, entrepreneurship, innovation, inequality, Piketty JEL: L26, J24, O20, P16

Acknowledgments: I would like to thank participants Darrell West, Rollin A. J. Van Broekhoven, Magnus Henrekson, Randal Morck, Fiona Sussan, Micro Tonin, Paul Willman, David Soskic, Tino Sanandaji, Pontus Braunerhjelm, Johanna Palmberg, Johan Eklund, Karen Wilson, and Charles Keidan for their valuable comments at the LSE seminar, “Billionaires: Advanced Capitalism, Philanthropy, and Democracy,” which was held in London in 2015, and at the Swedish Philanthropy Summit 2015, held in Stockholm. Funding was provided by the LSE Knowledge Exchange Project.

2

Introduction

When I asked my publicist what makes a bestseller, she replied “four factors”: How well known

is the author? How interesting is the subject matter? How broad is the book’s scope and reach?

And what is the “X” factor? I applied this logic to Thomas Piketty’s book, Capital in the Twenty-

First Century, and found the following: the author was not well known, the subject was

marginally interesting, and the book did have a broad reach. Most importantly, however, the X

factor was huge, and the book became an international sensation.

So what is the X factor that catapulted Capital onto the bestseller list? The book feeds

into the growing global debate about the long-term evolution of capitalism, inequality, the

concentration of wealth, and prospects for future social stability. Piketty puts the distribution of

wealth front and center in this debate and opens a window onto a future that is both brilliantly

illuminating and deeply alarming for any person concerned with human rights, equality, and

social justice. He asks the critical question, “Where is the capitalist system going in the long

run?” The answer, according to Derber (2015): “If we do not pursue that conversation, we may

lose our hope to solve urgent problems of extreme inequality, dynastic wealth and democratic

collapse” (p. xi).

Capital has been the subject of much debate. Soskice (2014), for example, argues that

Piketty’s central analysis of the current rise in inequality makes little sense because he bases it

purely on neoclassical mathematical analysis. Acemoglu and Robinson (2015) state “that general

economic laws are unhelpful as a guide to understand the past or predict the future, because they

ignore the central role of political and economic institutions…in shaping the distribution of

resources in society.” However, these critics seem to have missed the essential point about

3

capitalism, which, as Marx and Schumpeter both suggested, is an evolutionary process. If this is

true, then surely some general laws and institutions are needed to explain its evolution; for

example, what are the dynamics that propel the system forward? More to the point as Hopkins

(2014) argues that by leaving out government we have an incomplete story about Capital, “Even

if the fact of capital accumulation may respond to an economic logic, the process is embedded in

a very political logic, as is the reconstitution of capital.”

Because they do not understand the function of giving (Clinton, 2012), Piketty and others

dismiss moral capital—defined as “the resources that sustain a moral community” (Haidt, 2012,

p. 292)—as a hoax. Thus this paper aims to recast the great debate about Capital in the Twenty-

First Century through the eyes of philanthropy, the art of putting wealth to work for the common

good (Acs and Phillips, 2002; Acs and Braunerhjelm, 2005; Acs, 2013). The common good is

carefully described as a capitalist venture in social betterment. This is distinctly different from

the “acts of kindness” of the Great Society, or helping the poor in Victorian England, which were

not philanthropy but a form of charity. Why this critical distinction? Because when moral capital

is absent, wealth remains concentrated, rent-seeking flourishes, and innovation and

entrepreneurship and democracy suffer (Baumol, Litan, and Schramm, 2007). Philanthropy

propels the dynamics of capitalism in two primary ways. First, it lays the groundwork for new

cycles of enterprise by strengthening institutions that promote opportunity, innovation, and

entrepreneurship. Second, it provides a mechanism for dismantling accumulated wealth that is

made in the past and reinvesting it in ways that will strengthen future equality of opportunity.

This paper builds on the general laws of capitalism laid down by Piketty and shows how

moral capital, while not altering the general laws of capitalism, can move the system toward

long-run stability and growth. It does so by redirecting the flow of rents from individuals’ capital

4

to produce moral outcomes in the form of opportunity. The next section examines the last great

book on capitalism by Joseph Schumpeter. The third section recasts Schumpeter’s Capitalism,

Socialism, and Democracy (CSD) as capitalism, philanthropy, and democracy, thus setting the

stage for 21st-century dynamics. The forth section provides a framework for the understanding

the ecosystem of moral capital in the theory of capitalist development. Section five offers

evidence on the financial size of moral capital in the 21st century as applied to the American

experience, suggesting that philanthropy provided much of the fuel that propelled American

capitalism to triumph in the 20th century and is now spreading around the world in the 21st

century (Solamon, 2014).

Capitalism, Socialism, and Democracy

Capitalism, Socialism, and Democracy (1942) sits midway between Marx’s Capital (1851) and

Piketty’s Capital in the Twenty-First Century (2014). Published in 1942 as World War II raged,

the bestseller CSD fed into the growing debate about economics, specifically the long-term

evolution of capitalism, inequality, the concentration of wealth, and the prospects for social

stability. Although the news was filled with reports on the battles of Stalingrad and Midway, the

world also was looking ahead to what the world would look like after the bombs stopped falling.

In CSD, Schumpeter provided a chilling and sober account of the great debate between

capitalism and socialism, making three predictions. First, he asked the obvious: “Can capitalism

survive?” followed by his response, “I do not think so.” He then asked, “Can socialism work?”

replying, “Of course.” Finally, on the question “Will socialism be democratic?” he punted. In

other words, he was hopeful that socialism would be democratic but was unsure of the final

outcome. Schumpeter turned out to be wrong on all three counts: capitalism did survive and

flourish, while socialism not only failed, it turned out to be authoritarian and undemocratic.

5

Let’s start by explaining precisely what we mean by capitalism, and then examine why

Schumpeter did not believe it would survive. Capitalism, or bourgeois society, is a cultural

phenomenon that arose out of the success of business. Entrepreneurs and industrialists are not

born into the bourgeoisie like a feudal lord. Its foundation—the cement, steel, and glass of

capitalism—all consist of economic material. The entire focus of a bourgeois society is on the

economic side of life, and success is measured in terms of money. Capitalist society is defined by

an institutional pattern of which three elements are of key importance: private property,

regulation of the production process through contracts, and finance. In this world, economic

decisions are made in the privately owned and privately managed firms that lead to the

accumulation of capital.

Advanced capitalism is an evolutionary process in which the system relies on

entrepreneurship and innovation. “Evolutionary” refers to the fact that the system is constantly

changing as entrepreneurs create new firms that kill things: firms, products, processes and

existing jobs and thus is never stationary. New technologies and innovations created by the

capitalist enterprise are what keeps the engine going—just think of what happened to the

typewriter, the radio, even television! This process of change revolutionizes the economic

structure from within, continually breaking down the old models and creating new ones. “This

process of Creative Destruction is the essential fact about capitalism. It is what capitalism

consists of and what every capitalist concern has got to live with...This evolutionary process is

not about how entrepreneurs administer existing organizations but in how they build and destroy

them.”

However, at some point in the not too distant future, this process of change could come to

an end, if all needs are met and no new goods are needed, while at the same time production has

6

achieved a state of perfection. Economic growth would come to a halt and a stagnant state with

no growth would ensue. There would be nothing left for entrepreneurs to do and capitalism could

not survive.

Let’s next turn to the meaning of socialism. A socialist society refers to one with an

institutional pattern whereby control over the means of production and over production itself is

vested with a central authority. In other words, the economics of society belong to the public

rather than the private sphere. A socialist system replaces markets with planning, the

entrepreneur with the manager, and private property is replaced by state ownership. What

happens to private property under this model obviously depends on how each country chooses to

apply it. Historically, in some countries the state simply confiscated private property, in others it

redistributed wealth. But capital as we know it disappears along with capital markets.

The central tenet of socialism is that the economy is centralized. The state controls

production, and decisions on how and what to produce, and on who is to receive what goods, are

made by public authority rather than by privately owned and managed firms. Schumpeter refers

to the “march into Socialism,” by which he means the migration of people’s economic affairs

from the private to the public sphere.

According to Schumpeter, this process was accelerated by the catastrophic events of the

twentieth century—two world wars and the Great Depression, along with hyper-inflation in

Europe. What stands out in an analysis of capitalism is the role of the bourgeoisie,. Since the

bourgeoisie exists only as an economic force, its social function is not as easily defensible as was

the position of the nobility under feudalism, who were born into it. The capitalism social system

turns on private property, thus under capitalism the bourgeois fortress is politically defenseless,

leaving it vulnerable to aggression, by the working class especially if there is rich booty to be

7

gained. As Schumpeter said, “It is possible to buy the working class off for a time, but this last

resort fails as soon as the aggressors discover that they can have it all. Faced with increasing

hostility of the environment and by the legislative, administrative and judicial practice born of

that hostility in the 20th century the world lost patience in the Enlightenment.” The Age of

Enlightenment (or simply the Enlightenment, or Age of Reason) is an era from the 1620s to

the 1780s in which cultural and intellectual forces in Western Europe emphasized reason,

analysis, and individualism rather than traditional lines of authority.

By the early 20th century Socialism and its variants spread to most parts of the world.

Capitalism (entrepreneurship and innovation), democracy (economic freedom), and philanthropy

were rejected by nationalizing capital, replacing the market with central planning, and

exchanging democracy for totalitarianism. In effect, a new world order was put in place. There

was great sympathy for the socialists, even in the United Kingdom, especially during the Great

Depression and WWII. Only a few countries stood against this Orwellian future.

It is interesting to examine what was happening in the United States during this period of

expanding socialism in the 1930s and 1940s. While the private sector in the Soviet Union was

essentially taken over by the state, there was a more nuanced reaction in the United States.

Nevertheless, taxation and wage policies during the 1930s made it possible to expropriate the

bulk of the income from the upper brackets. The total national income in the United States paid

out in 1929 was $80.6 billion; the income bracket above $50,000 retained $5.2 billion after

paying taxes. In 1936, just seven years later after Herbert Hoover raised marginal taxes rates on

the rich the total national income paid out was estimated at $64.2 billion as the depression spread

around the country. The amount going to the rich was down to $1.2 billion. And this does not

include the inheritance taxes that were also raised significantly. The point is that a tremendous

8

transfer of wealth took place in the United States even during the Depression? The transfer of

wealth from those in the upper income brackets to the lower income brackets in the United States

is quantitatively comparable with that affected by Lenin in the Soviet Union who confiscated

almost all of the wealth of the upper income classes.

That brings us to democracy, “a system of government in which all the people of a state

or polity...are involved in making decisions about its affairs, typically by voting to elect

representatives to a parliament or similar assembly.”1 Democracy consists of four key elements:

(1) a political system for choosing and replacing the government through free and fair elections;

(2) the active participation of the people, as citizens, in political and civic life; (3) the protection

of the human rights of all citizens; and (4) the rule of law, whereby all laws and procedures apply

equally to all citizens.

In 1942, the question of whether socialism would be democratic was a major concern, as

it was clear by that time that the Communist Party in the USSR was not democratic. British

socialism was expected to be more or less so, but what about the rest of the world? What would

happen in Eastern and Central Europe and in China? Schumpeter was not clear on these

questions, but as it turned out, socialism is not a democratic system.

While not democratic, socialism has a certain amount of political legitimacy. Since the

British enlightenment, in the nineteenth century political legitimacy has derived from the popular

consent of the governed, both explicit and implicit, and any government that lacks the consent of

the governed is not legitimate. In other words, a system need not be democratic to be

considered legitimate, a condition that can be established by having codified laws, customs, and

cultural principles. The legitimacy of a state derives from having won a civil war, as in China; a

revolution, as in Russia; or an election, as in Chile after the election of Salvador Allende to the

9

presidency. Thus the actions of a communist government are considered legitimate, providing

they are endorsed by the people. In a democracy, however, legitimacy derives from the popular

perception that the elected government abides by democratic principles in governing and thus is

legally accountable to its people.

Was Schumpeter aware of any solution to the dynamics of the capitalist system other than

a socialist system? Schumpeter alluded to this problem in the “lost Chapter 7” of the Theory of

Economic Development (1937/1911). Chapter seven was published in the original 1911 German

version but not included in the first American version in 1937. In this lost chapter Schumpeter

wrote of the economy as a whole. He understood that the entrepreneur was involved in both an

economic and a social process that seeks to change society through innovation. Schumpeter

wrote, “His position as entrepreneur is essentially only a temporary one, namely, it cannot also

be transmitted by inheritance: a successor will be unable to hold onto that social position, unless

he inherits the lion’s claws along with the prey” (as quoted in Acs, 2009 p. 320). In other words,

a mechanism is needed to hold the legitimacy of the social pyramid together when the offspring

only inherit money as opposed to money and the entrepreneurial skill. If the children are not

entrepreneurs, that social position needs to be reinvented with each new generation. Schumpeter

was never able to fully close the circle on this story and instead veered off in the direction of the

great Marxian drama of the 20th century—socialism.

Capitalism, Philanthropy, and Democracy

By the end of the 20th century, socialism had collapsed. The system simply could not keep pace

with the economic output of its competitors. Capitalism (entrepreneurship and innovation) has

had a fresh start, socialism has been relegated to the dustbin of history, and democracy is

10

flourishing in a majority of countries around the world. The fall of the Berlin Wall, as interpreted

by Fukuyama’s (1989) book The End of History and the Last Man drove the final nail into the

coffin of Capitalism, Socialism, and Democracy and the views presented by Schumpeter.

However, no new blueprint has emerged along the lines of CSD for the world to follow. What

would a new blueprint look like? Part of the answer is found in Alexis de Tocqueville who

wrote, that while both socialism and democracy appeal to our better side, socialism is about

equality via servitude and restraint, whereas democracy seeks equality of opportunity. So we

should start our search by seeking answers to the question of how we create equality of

opportunity for all and promote democracy.

Schumpeter was wrong in his prognosis, at least in the short run, and he missed an

essential aspect of capitalism. The answer to the turnaround question is to be found, I believe, in

the role played by moral capital and the part philanthropy plays in promoting equality of

opportunity in the capitalist system, especially in the United States. Through philanthropy,

private individuals create public goods, rather than relying on the state to do it all. Philanthropy

gives legitimacy to the bourgeoisie (entrepreneurs and capitalists) by reconstituting private

wealth to create public goods. We are not arguing that government does not create opportunity,

but, rather, that philanthropy gives opportunity an extra push without political or market

constraints.

Schumpeter and many others missed the importance of this great 19th-century invention:

the redirection of capital from private ends to public goals, including the private creation of

public goods—in short, philanthropy. According to Oliver Zunz, “American philanthropy today

expands knowledge, champions social movements, defines active citizenship, influences

policymaking and addresses humanitarian crisis. How did philanthropy become such a powerful

11

and integral force in American Society?” (Zunz, 2012). At the heart of this drama is the

entrepreneur, who sets the capitalist system in motion through innovation and then uses his

wealth and skills for the public good (West, 2014). The bilateral relationship between

entrepreneurship and institutions is the hallmark of capitalism: our institutions determine the type

of entrepreneurship we will have, just as entrepreneurs determine the type of institutions we will

have (Henrekson and Sanandaji, 2010).

The tension in advanced capitalism is therefore not between the winners and losers who

are sorted out by creative destruction as Piketty suggests (uber destroying the jobs of drivers who

bought a permit vs those that do not need a license). But between enabling the creation of vast

wealth by those who innovate and protecting opportunity for those who do not—the great sea

saw of civilization. Philanthropy has the potential to mitigate inequality as it softens the hard

edges of the free market. Recycling wealth reduces income inequality and contributes to a more

just and prosperous society.

So the issue is what to do with wealth?: keep it, tax it away, give it away. If you leave

only money to the next generation, you leave them poor. They will squander it. This was true in

the past, and it still pertains to systems that protect the nobility—the major difference between

the American experiment and the class systems of old Europe and much of the world. Cornelius

Vanderbilt made a fortune in the railroad and left a huge fortune to his children. Much of the

fortune disappeared over time. At the last family reunion in 1973 we failed to find one

millionaire among the 120 present. Today in the United States parents are leaving their children

less and less money. It does the children little good and it does society even less. Today we are

starting to return to a world where wealth is used to create a better future for all.

12

In the 21st century, the world is returning to its 19th-century roots of liberal democracy

and capitalism is flourishing across the globe. However, the world has not yet come to

understand and appreciate the fact that these two forces cannot survive and prosper without

philanthropy. While capitalism is a cultural phenomenon and democracy has institutional

underpinnings, philanthropy is a natural force that has existed in all societies and has taken

different forms historically, but it was never used to create opportunity. Nevertheless, the need to

look after each other is part of humans’ DNA. In this debate we need to understand the dynamics

of socioeconomic formations, and recognize that philanthropy matters because it offers an

alternative solution to the Piketty conundrum without relying exclusively on a wealth tax.

The question today, as in 1942, is what will our future society look like—the X factor

that catapulted Piketty’s Capital in the Twenty-First Century to the bestseller list. Piketty (p.1:

The distribution of wealth is one of today’s most widely discussed and controversial issues.

But what do we really know about its evolution over the long term? Do the dynamics of

private capital accumulation inevitably lead to the concentration of wealth in even fewer

hands, as Karl Marx believed in the nineteenth century? Or do the balancing forces of

growth, competition, and technologic progress lead in later stages of development to

deduced inequality and greater harmony among the classes, as Simo Kuznets thought in the

twentieth century? What do we really know about how wealth and income have evolved

since the eighteenth century, and what lessons can we derive from that knowledge for the

century now under way?

According to Piketty, the main driver of inequality is the tendency of return on capital to exceed

the rate of economic growth, r > g, where r historically is close to 5 percent and growth in

Organization for Economic Co-operation and Development member countries g is below 2

13

percent. I believe, however, that the real X factor was the policy prescription—a global tax on

capital—that was embraced by the Left and lamented by the Right. Therefore, the real issue is

whether capitalism can be both economically and morally robust.

To understand the question, “How does inequality matter in terms of our economic well-

being?” we need to examine the laws of capitalism. Here Piketty was brilliant. The first

fundamental law of capitalism links the stock of capital to the flow of income from capital: α = r

× β, where β is the capital/income ratio, r is the rate of return on capital, and α is the share of

national income from capital. Piketty examined this accounting identity over the past two

centuries in great detail.

The second fundamental law of capitalism is β = s/g, where s is the savings rate and g is

the growth rate. In the long run, the capital-income ratio is related in a simple and transparent

way to the savings rate, s, and the growth rate of national income, g. Fundamentally, a country

that saves a lot and grows a little will accumulate an enormous store of capital relative to income.

The law is asymptotic, meaning that it is valid only in the long run. The difference between the

first and second laws is that the first is an accounting identity, whereas the second is the result of

a dynamic process the economy tends toward, given the savings rate, s, and growth rate, g.

Piketty’s analysis, however, is not without his critics. For example, Soskice (2014) argues

that Piketty’s purely neoclassical and mathematical analysis of the growth of contemporary

inequality makes little sense. Soskice recommends “a more realistic model in which businesses

determine investment growth based on their expectations of output growth, with monetary policy

bringing savings into line with business determined investment; the implication of this model is

that β does not change at all. And in fact as other recent empirical work which I reference has

noted, β has not changed significantly over these recent decades.”

14

Piketty has lots of critics. For example, Rognlie (2015) starts his discussion of Piketty by

looking at the data on inequality over the past 70 years. He argues that, although both gross and

net measures are important, the net viewpoint—which is much rarer in the recent literature—is

more directly applicable to the discussion of distribution and inequality because it reflects the

resources individuals are ultimately able to consume. This measure reveals a striking discrepancy

in the long-term behavior of gross and net shares, showing that the net capital share generally fell

from the beginning of the sample through the mid-1970s, at which point the trend reversed.

There is a moderate increase over the long run in the aggregate net capital share, but this is due

entirely to the housing sector. Acemoglu and Robinson (2015) state:

General economic laws are unhelpful as a guide to understand the past or predict the future, because they ignore the central role of political and economic institutions, as well as the endogenous evolution of technology, in shaping the distribution of resources in society….the main economic force emphasized in Piketty’s book, the gap between the interest rate and the growth rate, does not appear to explain historical patterns of inequality. The critics’ views aside, to understand why Piketty is right about the laws of capitalism

we must go back to the building blocks of modern society. Capitalism, philanthropy, and

democracy are the fundamental pillars of modern civilization. Democracy goes back to the 5th

century BC in the Greek city state of Athens. In the 17th century, the West invented capitalism,

which brought the Industrial Revolution, jobs, and opportunity to millions. However, the

institutional structure that sustained this development was much broader and had roots that go

back much farther. Philanthropy is older than Rome itself. The concept of moral capital emerged

only in the 19th century. While capitalism is governed primarily by the market system and

democracy by the political process, philanthropy is to a large degree independent of both forces.

Nevertheless, it also reinforces and nourishes both by relying on the better side of human nature.

15

Philanthropy as an institution directly alters the ownership of capital and the allocation of

income in the capitalism system. It can do this in partnership with government, and in fact it

works best when government and philanthropy work hand in hand. So how does philanthropy

solve the Piketty conundrum? The answer is rather simple: by increasing the growth rate of the

economy, g, to mitigate the difference between r and g and reduce the share of income going to

the owner of capital. Thinking of the two laws together, the aim is to maintain the dynamism of

the system (efficiency) while solving rising income inequality (equity). This is done in part by

increasing growth, g, and reducing the share of capital income going to the rich while

maintaining a high r. The focus is on the capital/income ratio. Philanthropy focuses on the stock

of capital (wealth) and not the flow of income, and it does not affect the stock of capital but

redirects the flow of income to opportunity-creating activities. In other words, by turning a share

of capital into moral capital, philanthropy reduces the size of r and increases the growth rate of

the economy, g, and thus the Piketty conundrum is solved, r ≈ g.

A few years ago, as I was trying to get a better understanding of advanced capitalism, I

wrote in the American Interest that the essence of advanced capitalism today is not a static “iron

triangle” that balances the interests of large corporations and organized labor with the active

intervention of government. Nor is it a free-for-all in which the interests of the many are readily

subsumed by the acquisitive appetites of the few. Rather, advanced capitalism is a dynamic

process that balances wealth and opportunity—the great seesaw of civilization. It follows that the

success of advanced capitalism must turn not on its transient ability to generate macroeconomic

growth but on its sustained ability to generate microeconomic opportunity.

The forces of capitalism, philanthropy, and democracy need to be woven together

institutionally into a global system of opportunity and prosperity for all. The central mission of

16

globalization is to help make this a reality. We need to establish a dialogue among the wealthy,

the research institutions, and the education institutions. We need to bring the cultural, natural,

and institutional aspects of humanity together to ensure our social survival throughout and

beyond the 21st century. While many look to government as the solution to our conundrum and

others espouse the free market, I suggest that philanthropy holds the key to our future because it

is a key to competition and the key that unlocks regional competitiveness.

Philanthropy has long been a distinctive feature of American culture, but its crucial role

is the economic well-being of the nation—and the world—which remains largely unexplored

(Zunz, 2012). Philanthropy achieves three crucial aims: it deals with the question of what to do

with capital—keep it, tax it, or give it away. By investing part of your capital in a foundation that

works for the public good, you maintain the stock of capital and the capital/income ratio while

income flows to a privately created public good, which complements government creation of

public goods. Moreover, by focusing on education, science, and medicine, philanthropy has a

positive effect on long-run economic growth.

For wealth to invigorate the capitalism system, it needs to be kept in rotation like the

planets round the sun. Philanthropy strengthens capitalism in two ways: first, when targeted

toward universities, research, and other productive uses, philanthropy lays the groundwork for

new cycles of innovation and enterprise. Second, it strengthens capitalism by providing a

mechanism for dismantling wealth accumulated in the past and reinvesting it in the

entrepreneurial potential of the future. When philanthropy is absent, capital remains

concentrated, rent-seeking flourishes, and innovation and entrepreneurship suffer. In other

words, monopoly spreads (Acs, 2013).

17

But how can philanthropy be a part of capitalism? Capitalism, as Max Weber (1958)

showed, is a relatively orderly system of institutions and incentives governed by the tractable

logic of supply and demand. Philanthropy, by contrast, lacks a set of laws to explain its ebb and

flow. Philanthropy is subject to the whims of the wealthy, like the royal art patrons from

European history. Furthermore, philanthropy is not only largely ungoverned by economic

principles, it is also relatively free of the checks and balances found in democracy, such as

elections and referendums (Acs, 2013).

The answer to this puzzle is found in the writings of moral philosopher Adam Smith, who

wrote, “There are evidently some principles of [man’s] nature, which interest him in the fortune

of others and renders their happiness necessary to him.” Philanthropy is governed by natural

principles and embedded altruism, while capitalism is governed by culture and institutions (Acs,

2013, pp. 143-144). While philanthropy has been loyal to the institutions of capitalism, is it

rarely considered intertwined with capitalism, even though it both emanated from and

continually nurtured the capitalist system. This invisible, underappreciated force for progress

within advanced capitalism is the secret ingredient that fails to get mentioned in economic

accounts of capitalism, like Piketty’s Capital.

Philanthropy does not interfere with the dynamics of capitalism. Individuals are free to

accumulate capital, and because the growth rate of the economy is not compromised with taxes,

the capital/income ratio can rise in the long run. I have argued that philanthropy propels the basic

machinery of capitalism, along with government and taxes. Therefore, in addition to well-

functioning markets, property rights, contract law, capital markets, and the like, philanthropy—a

little understood economic force—provides an institutional element that promotes the vital

18

nonmonetary institutional forces needed to achieve growth through technological innovation,

thereby promoting economic equality and cultivating economic security (Acs, 2013).

The Ecosystem of Moral Capital

This paper has described advanced capitalism as interplay between innovators and entrepreneurs

on the one hand, and the vast system of universities, foundations, and research institutions they

have created on the other. This back-and-forth has helped society navigate the dual obligation to

create both wealth and opportunity—the critical balancing act that determines the true strength of

any civilization. By opportunity in this case I mean the extent to which individuals can particpate

in the economic sysem, which is perhaps how the term is most commonly used, as well as the

ability of new firms and new ideas to enter the economy.

Prosperity is often defined in terms of easily expressed statistics such as GDP, which

allow easy comparisons between countries and provide a stable quantitative assessment of how

an economy has performed. My goal is to get people to think about prosperity not just in terms of

GDP but also in terms of some key features of the economy that, in my view, underpin its

strengths and weaknesses.

The ecosystem of advanced capitalism is organized around four characteristics:

opportunity, entrepreneurship and innovation, wealth creation, and philanthropy. I define these

characteristics as currents, like those in the ocean, which shift over time and space with the

changing contours of the ocean floor and the shoreline. In the context of the political economy,

none of the four “currents” I have described is a necessary or sufficient condition for economic

prosperity. Rather, each has played a vital role in shaping the unique prosperity of the economy

19

during certain periods in history, often but not necessarily assisted by the strength of other

currents.

During the 1990s the current of innovation was larger than life, as entrepreneurs invented

and commercialized the products of the digital age, primarily in information technology and

telecommunications. It was the age of personal computers, the Internet and smart phones. The

digital revolution and globalization created not only new products and services but also large

amounts of wealth in country after country, as entrepreneurs and venture capitalists created a

new economic landscape. Today the current has shifted and the focus is on wealth and

opportunity, which loom large as these waves of innovation crash ashore in country after

country.

Figure 1: The Currents of Prosperity

The current our story centers on is philanthropy, or moral capital, which as we have

argued will be increasingly important globally as the currents of wealth and opportunity come

innova&on  

capital  

moral  capital  

opportunity  

20

into sharp relief. Over the coming decades, these currents will alter the content of our political

economy.

At the heart of advanced capitalism—and the ability to attract and sustain entrepreneurial

activity—is acceptance of the cycle of creative destruction. To some, this is a double-edged

sword. On the one hand, creative destruction enables superior innovations to displace old

companies and products. However, this process can also be damaging, as the losers are put out of

work and, in some cases, entire towns or regional economies suffer. The governments of some

countries play an active role in holding creative destruction at bay, whereas others support a

system that allows creative destruction to do its work despite the uncertainty it can bring. This

nurtures dynamism and, perhaps most importantly, fuels the entrepreneurial spirit of advanced

capitalism.

Advanced capitalism has created the world’s largest system of knowledge-creating

universities and research centers, some of which are private and all of which have benefited from

a vast allocation of philanthropic capital, which itself is tied to capitalism. Furthermore,

foundations developed during the 19th century explicitly to recycle wealth have sustained and

challenged existing ways of creating opportunity for millions of people, which is itself the

fundamental benchmark by which advanced capitalism should be judged.

These efforts have contributed to the creation of opportunity much more than are often

acknowledged. It is easy to point out that income inequality and persistent poverty are the result

of a heartless and individualistic system of capitalism, and this may cause some people to

conclude that advanced capitalism is a failure. However, this ignores the fact that advanced

capitalism has stayed true to opportunity creation throughout much of its long history. The scope

of philanthropy in modern civilization is unmatched by any other time in history. Therefore, the

21

tension in advanced capitalism is not between the winners and losers that are sorted out by

creative destruction but between enabling vast amounts of wealth creation for those who

innovate while protecting opportunity for all. The clash of these two currents is the greatest

challenge for the ecosystem of advanced capitalism.

What is missing from this story is the role of government. The government is an actor.

The collective will of the people and how it impacts our lives is a very real and important part of

this debate. For most of the 20th century the citizenry looked to government to solve most of its

problems, thus a large and growing government was viewed as crucial to the working of the

entrepreneurial ecosystem.

Figure 2: The Ecosystem of Moral Capital

government  

Innova&on  

capital  

Moral  Capital  

opportunity  

22

Figure 2 places government front and center in our story. The center ball is bigger than

the others because many people consider government more important than the other currents.

Moreover, not only the size but the role of government is a central issue, as it is seen as playing

an important role in all four currents. First, government plays a direct and important role in

opportunity by providing education, equal opportunity, and decent wages. Of course government

may not do any of this. Second, while it does not play a direct role in innovation, government is

seen as a facilitator that supports innovation with research and development grants, financing,

regulation, and technology transfer. Third, government plays an important role in wealth. It is

supposed to get the rich to pay their fair share through progressive income taxes, the capital

gains tax, and inheritance taxes. Finally, the government interacts with philanthropy and charity.

Over the years especially since the Second World War the government has taken over many

functions once provided by charities in, education, health care, medical research and the arts. If

government put too much pressure on the system, the balance of advanced capitalism would shift

in fundamental ways.

23

Figure 3: The Ecosystem of Socialism

This leads to a very interesting question, “How large should the government be?” And,

“What should it do?” This is one of society’s most debated questions, both today and in the past,

and is at the heart of almost all discussions about opportunity, innovation, wealth, and

philanthropy. Figure 3 shows a more or less socialist model, as envisioned by Schumpeter and

most socialists, in which the government is pervasive, large, and intrusive. It intervenes into

opportunity, innovation, wealth, and moral capital and tries to manage the four currents, although

it does leave some things to the private sector. History has shown us that it is as hard to manage

the currents of the political ecosystem as to change the course of a mighty river; the effort may

succeed for a while, but in time the river will once again find its own way.

government  

Innova&on  

capital  

Moral  capital  

opportunity  

24

Figure 4: The Ecosystem of Limited Government

Figure 4 represents the currents of prosperity with the government playing a limited role.

The idea of a small government suggests that the currents of the political economy are so strong

and changeable that no government can control its outcome. Therefore, government is most

effective when it sets the rules of the game with respect to how we navigate the economic

currents, both nationally and internationally.

government  

Innova&on  

capital  

moral  capital  

opportunity  

25

Figure 5: The Ecosystem of Moral Capital with limited philanthropy

Figure 5 depicts the world as seen by Piketty, and most liberals and social democrats

today who would have us believe that moral capital does not play a significant role in advanced

capitalist countries. In Piketty’s model, government is large and moral capital is very small. In

this view, markets don’t function without the state as partner, nurturer, and regulator. The state

can also play the role of innovator and provide social cohesion by producing and redistributing

public goods. In this sense, the state is the ultimate philanthropist; where there is a just tax

system, it acts in a democratic fashion.

In the figure, the line from wealth goes through government to opportunity and then to

innovation, with the state playing an active role in creating wealth. This leads to interesting

questions: “Is government more effective than philanthropy in creating opportunity?” Does

Philanthropy help? and “What are the limits of the welfare state?”

government  

Innova&on  

capital  opportunity  

26

Moral Capital in the 21st Century

To answer these questions, in this next section, we present some of the first data on moral

capital. While internationally comparable data on the Ecosystem of Moral Capital opportunity

(education), entrepreneurship (startup rates), wealth (Billionaires), has been around for a while.

Such data are now available in some form in most countries; for example, we know which

countries are the most entrepreneurial, which have the most billionaires, and which offer its

citizens the most opportunity. However, data on moral capital in any of its dimensions has not

been available even at the country level. We start by looking at contributions from the wealthy

that have transferred ownership of capital to moral capital. Next we present data on the size of

moral capital in the US and around the world as data allows. Based on this information, we can

start to consider just how important moral capital is in today’s global society.

As we have previously pointed out, philanthropy strengthens capitalism by introducing

new institutions, which in turn create opportunity for agents that leads to entrepreneurship and

innovation. Innovation leads to increased productivity and regional competitiveness, for which it

is often overlooked. In the founding document of the Marshall Institute for Philanthropy and

Social Entrepreneurship at the London School of Economics, Sir Tom Hughes-Hallett wrote,

“Private contributions to the public good of time, talent and treasure will be the crucial

ingredients of a successful society and a new, more responsible model of capitalism.” Paul

Marshall, who donated $50 million to establish the institute, added that “London is the most

exciting city in the world, a crossroads for global commerce, learning and creativity, and it is

fitting that our new Institute will be situated at the heart of this great city.”2

If philanthropy introduces new institutions into the capitalist model, it is the investment

in place that leads to a better world. By place we mean where the investment was made, the city

27

the region the organization (Acs, 2015). The Marshall Institute will enrich LSE, London and the

UK. Perhaps the most visible aspects of this are the moral investment made in education.

Education in America started out by following the English model’s focus on the classics,

religion, and language. However, it took an interesting turn in the 18th century when it broke

from the continental approach and shifted to a more practical model led by Benjamin Franklin

and Thomas Jefferson. King’s College, which became Columbia University, announced in 1754

that its curriculum would emphasize surveying, navigation, geography, and history.

Ben Franklin’s College of Philadelphia, later the University of Pennsylvania, made even

greater strides in this direction. In 1756, the college’s president proposed that “economic

abundance” would require forming a succession of sober, virtuous, industrious citizens and

checking the trend of growing luxury. To carry out his vision, the president designed a course of

study approved by Franklin and the college’s trustees that increased the emphasis on practical

studies and science.

As historian Frederick Rudolph (1990) put it in his history of American colleges, “The

King’s College prospectus of 1754 and the College of Philadelphia’s curriculum of 1756 may not

have been the first shots in an exchange heard around the world, but they were nonetheless

certain indications that the English colonies of North America were beginning to respond not to

English needs but to American aspirations” (p. 33). This experiment was made possible by the

growing largess of the bourgeoisie’s new wealth.

However, this was not the only shift to set the stage for innovation, as the federal

government also moved into high gear. The land-grant universities were so called because of the

Morrill Federal Land-Grant Act of 1862, sponsored by Congressman Justin Smith Morrill to

support agricultural education. Morrill suggested that colleges in America should “top off a

28

portion of the studies established centuries ago as the mark of European Scholarship and replace

the vacancy—if it is a vacancy—by those of a less antique and more practical value” (Lucas,

1994, p. 147).

Wisconsin’s public university system is a prominent example. Like many of the

universities emerging at the beginning of the 20th century, Wisconsin was experimenting with

new methods of productivity that would benefit society. Under the leadership of Charles Van

Hise, its president from 1903 to 1918, the university set about innovating and expanding with the

ultimate goal of serving the state’s entire population.

While the federal government was funding and experimenting with higher education, a

comparable effort was underway that was funded by the private wealth of the new land. Johns

Hopkins, John Rockefeller, and Leland Stanford all founded new research universities modeled

after Humboldt University in Germany. These institutions funded with American fortunes

created three of the world’s greatest universities. Stanford University, for example, was founded

in the fall of 1885 with Stanford’s grant of $8 million and 10,000 acres of land. Today the

university has an $18 billion endowment, enrolls roughly 15,000 students, and is ranked at the

top in several fields, including engineering and technology, life and physical sciences, and health

sciences. In creating Stanford University, Leland envisioned ways to provide a “practical

education” that still guide the university more than 100 years later.

The world today is witnessing the evolution of this tradition of giving, but with a new

twist. On September 8, 2014, Harvard University announced that it had received the single

largest gift in its 378-year history. This gift was not from an American billionaire but from

brothers Gerald Lok-chung Chan and Ronnie Chi-chung Chan of Hong Kong, who made the

$350 million unrestricted contribution through their education-focused charity, the Morningside

29

Foundation. Morningside is the philanthropic unit of the Chan’s private equity and venture

capital firm, the Morningside Group. The money was given to the Harvard School of Public

Health, which has been rebranded as the T. H. Chan School of Public Health. This is the first

time Harvard has named one of its schools to recognize a gift and the only second of its schools

to bear the name of an individual; the John F. Kennedy School of Government was so named in

1966.

On January 27, 2014, former New York City mayor Michael Bloomberg announced his

latest donation to Johns Hopkins University, a $350 million gift that was the largest in the

university’s history. Bloomberg has given $1.1 billion dollars to his alma mater over the last four

decades, a staggering amount of money that makes him the most generous donor to any

educational institution in the United Sates. Bloomberg’s Giving Pledge letter sheds light on what

he hopes to accomplish by giving money away: “If you want to fully enjoy life—give. And if

you want to do something for your children and show how much you love them, the single best

thing—by far—is to support organizations that will create a better world for them and their

children” (www.thegivingpledge.org).

However, the most spectacular development in creating a better world for our children’s

children, to echo Mayor Bloomberg, was made by American billionaire Stephen A.

Schwartzman, the founder of Blackstone Capital, who donated $100 million to build a world-

class college in China. Schwartzman College is a state-of-the art facility at Tsinghua University

in Beijing, which will house the new college. Originally established in 1911 by an agreement

between the Qing Emperor and the U.S. government to prepare Chinese students to study in the

U.S., Tsinghua University has long served as a bridge between the East and the West. The new

college will house Schwartzman scholars, which are modeled after the Rhodes scholars. Each

30

new cohort of Schwartzman scholars will join a global network of the world’s most talented

young leaders, who will help to build strong links between China and a rapidly changing world.

Each year, 200 exceptional men and women will be accepted to the program: 45 percent from the

U.S., 20 percent from China, and 34 percent from the rest of the world. Designed to prepare the

next generation of global leaders, the Schwartzman scholarship is the first to respond specifically

to the geopolitical landscape of the 21st century. “Whether it’s politics, business or science, the

success of future leaders around the world will depend upon an understanding of China’s role in

global trends” (http://schwarzmanscholars.org/about).

We present some evidence on the rise of moral capital to provide a better sense of these

global trends. First, we estimate the size of moral capital measured in dollars for a segment of the

U.S. education establishment in the 20th century. Using balance sheet data, Table 1 presents the

estimated size of the moral capital of the largest 25 universities in the United States and lists

their total assets. It also lists real assets, which measures buildings and land. The top 25

universities have moral capital of $484,663,000, or almost half a trillion dollars. However,

endowments alone do not paint an adequate picture of the size of universities’ moral capital and

they greatly underestimate the size of moral capital, which is over a trillion dollars for the top

1,000 colleges and universities in the United States.3

Table 1: Moral Capital for the Top 25 Universities in the U.S.

University   Total  Assets     Real  Assets   Endowment  

 ($Millions)   ($Millions)   ($Millions)  

Harvard  University   74209.807   5793.371   30435.375  

Yale  University   31265.211   4347.257   19345  University  of  Texas  System(15)   54112.7   13144.6   18263.85  

Princeton  University   22754.06   3227.763   18200  

Stanford  University   37987.903   5994.616   17035.804  

31

MIT   17719.84   2516.264   10149.564  University  of  Michigan,  Ann  Arbor   16435.216   5369.4   7691.042  Columbia  University   14728.942   3068.544   7654.152  

Texas  A&M  University  System   9078.661   9078.661   7638.555  Northwestern  University   10917.16   1683.639   7118.595  

U  Pennsylvania   16017.853   4369.373   6754.658  University  of  Chicago   12525.477   3733.388   6570.875  

University  of  Notre  Dame   10329.366   1350.192   6329.866  University  of  California  System(10)   53356.279   26179.885   5962.906  Emory  University   11456.053   2777.055   5816  

Duke  University   15536.933   3276.533   5555.196  Washington  University  in  Saint  Louis   9807.33   1901.786   5225.992  Cornell  University   11505.819   3544.465   4946.954  

University  of  Virginia   8978.546   3097.929   4788.852  

Rice  University   6686.951   1183.159   4418.595  University  of  Southern  California   8790.257   2537.902   3488.933  

Dartmouth  College   6182.484   944.327   3486.383  Vanderbilt  University   7605.896   1781.293   3399.293  

New  York  University   12258.579   5481.727   2755  Brown  University   4415.343   1019.875   2624.332  

Totals   484,662,666   117,403,004   215,655,772  

Source: Compiled by the author

The list includes both public and private schools, and it shows that Americans have

funded private universities at a level that is on par with or surpasses the state institutions. This

creates a competition for faculty, research, and students, which leads to a healthy and innovative

system. Harvard tops the list with an endowment of $30 billion, followed by Yale with $20

billion, the Texas system with $20 billion, and Stanford University with $18 billion. However,

the sum of the total moral capital, including endowment and real assets, is much larger.

The top 1,000 universities have a total endowment of half a trillion dollars, with an

average endowment each of $500 million. Most of these institutions are private, but even small

colleges like Smith College, with 2,000 undergraduates, have an endowment of more than $1

32

billion. Without this inflow of funds that generates over $50 billion a year in income, these

universities would not be able to compete with one another. These figures understate these

institutions’ wealth because they do not include the value of land and buildings, which can run

into the billions in urban areas.

Table 2 lists the European universities by endowment; the top 50 present an interesting

comparison to the United States, as moral capital in European universities is far less than in the

United States. While Oxford and Cambridge lead the field with close to 5 billion euros, the next

entry falls off rapidly, at around 1 billion euros. Each country seems to have one well-endowed

institution, such as the University of Lund in Sweden, the University of Helsinki in Finland, and

Heidelberg University in Germany. But the fact remains that, while Europe is in some ways

similar to the United States, for example, it is a liberal democracy, Europe’s investment in moral

capital is far short of what it should be.

Table 2: List of European Universities by Endowment

Institution   Country  Endowment  2010  (€m)  

Endowment  2009  (€m)  

University  of  Cambridge   UK     5,354.6  

University  of  Oxford   UK   4,284.0    

Swiss  Federal  Institute  of  Technology  Zurich   Switzerland   1,100.6   1,058.5  

University  of  Copenhagen   Denmark   1,003.8    

University  of  Zurich   Switzerland   960.4   941.5  

Utrecht  University   Netherlands   749.0    

Lund  University   Sweden   724.5    

Central  European  University   Hungary   656.62    

University  of  Oslo   Norway   652.8    

University  of  Helsinki   Finland     624.0  

University  of  Amsterdam   Netherlands   613.5   597.9  

University  of  Bern   Switzerland   584.3    

École  Polytechnique  Fédérale  de  Lausanne   Switzerland   595.5   600.4  

Ruprecht  Karls  University  of  Heidelberg   Germany   579.2    

33

Karolinska  Institutet   Sweden   576.1   535.2  

University  of  Groningen   Netherlands   576.0    

Uppsala  University   Sweden   549.6    

Technical  University  of  Munich   Germany     548.0  

Technical  University  of  Denmark   Denmark   546.7    

University  of  Vienna   Austria   493.6    

Ludwig  Maximilians  University  of  Munich   Germany     485.4  

University  of  the  Basque  Country   Spain   483.4    

Radboud  University  Nijmegen   Netherlands   482.3   461.7  

Aarhus  University   Denmark     480.3  

University  of  Tübingen   Germany   479.0    

Leiden  University   Netherlands     477.8  

Erasmus  University  Rotterdam   Netherlands     470.0  

Vrije  Universiteit   Netherlands   433.6   420.1  

University  of  Strasbourg   France   432.0    

Stockholm  University   Sweden   417.7    

Ghent  University   Belgium   410.0    

Royal  Institute  of  Technology   Sweden   403.8    

Pierre  and  Marie  Curie  University  (Paris  6)   France   400.0    

Delft  University  of  Technology   Netherlands     382.7  

Free  University  of  Berlin  (excl.  Charité)   Germany   380.0    

University  of  Barcelona   Spain   379.3    

Université  Catholique  de  Louvain   Belgium   370.0    

Humboldt  University  of  Berlin  (excl.  Charité)   Germany   352.0    

University  of  Basel   Switzerland   351.4    

University  of  Geneva   Switzerland   349.1   292.3  

University  of  Milan   Italy     341.0  

University  of  Lausanne   Switzerland   323.9    

Maastricht  University   Netherlands   323.0   322.1  

Eindhoven  University  of  Technology   Netherlands     293.7  

Albert  Ludwigs  University  of  Freiburg   Germany     268.3  

Source: http://en.wikipedia.org/wiki/List_of_European_universities_by_endowment

If moral capital is in fact a part of the institutional structure of advanced capitalism, we

should see evidence of this both across countries and over time. Table 3 lists the largest

charitable foundations in the world. The most interesting observation is that most of these

foundations are a rather recent phenomenon. The oldest is the Kamahameha Schools, founded in

34

1887, The Rockefeller Foundation, created in 1913, followed by the Knut and Alice Wallenberg

Foundation in 1917, and the Kresge Foundation in 1924. W. K. Kellogg, Welcome, and the Lilly

Endowment were founded in the 1930s, and 20 were founded after 1950. So in fact philanthropy

is in fact primarily a development of the 20th century, and the pace is accelerating. The second

observation is that the United States is no longer such an outlier in philanthropy, as fully one-

third of the foundations are outside the U.S., as are three of the seven largest. The largest

foundation is the Stichting INGKA Foundation in the Netherlands; founded in 1982, it has $36

billion in assets. The Welcome Trust is the third largest, with $22 billion in assets in the UK in

1936. The Mohammed bin Rashid Al Maktoum Foundation, founded in 2007 in the United Arab

Emirates, has $37 billion in assets.

Table 3: List of Wealthiest Charitable Foundations in the World

Rank   Organization   Country   Headquarters  Endowment  

(USD)  Endowment  

(home  currency)   Founded    

22   Andrew  W.  Mellon  Foundation  

 United  States   New  York  City,  New  York  

$5.26  billion     1969    

2  Bill  &  Melinda  Gates  Foundation    United  States  

Seattle,  Washington   $34.6  billion     1994    

30  Calouste  Gulbenkian  Foundation  

 Portugal   Lisbon   $3.5  billion   €2.8  billion  (EUR)  

1956    

17   David  and  Lucile  Packard  Foundation  

 United  States   Los  Altos,  California   $5.8  billion     1964    

5   Ford  Foundation    United  States  New  York  City,  New  York   $11.0  billion     1936    

16   Garfield  Weston  Foundation  

 United  Kingdom   London   $6.5  billion   £4.2  billion  (GBP)  

1958    

20   Gordon  and  Betty  Moore  Foundation  

 United  States   Palo  Alto,  California   $5.4  billion     2000    

4  Howard  Hughes  Medical  Institute    United  States  

Chevy  Chase,  Maryland   $16.1  billion     1953    

6   J.  Paul  Getty  Trust    United  States   Los  Angeles,  California  

$10.5  billion     1982    

18   John  D.  and    United  States   Chicago,  Illinois   $5.7  billion     1975    

35

Rank   Organization   Country   Headquarters   Endowment  (USD)  

Endowment  (home  currency)   Founded    

Catherine  T.  MacArthur  Foundation  

2  Kamehameha  Schools    United  States   Honolulu,  Hawaii   $7.3  billion     1887    

21  Knut  and  Alice  Wallenberg  Foundation  

 Sweden   Stockholm   $5.3  billion   kr  32.7  billion  (SEK)  

1917    

9   Li  Ka  Shing  Foundation  

 Hong  Kong   Hong  Kong   $8.3  billion   $64.4  billion  (HKD)  

1980    

13   Lilly  Endowment    United  States  Indianapolis,  Indiana   $7.28  billion     1937    

7  Mohammed  bin  Rashid  Al  Maktoum  Foundation  

 United  Arab  Emirates  

Dubai   $10.0  billion   $36.7  billion  (AED)  

2007    

29   Realdania    Denmark   Copenhagen   $3.5  billion   €2.8  billion  (EUR)  

2000    

15  Robert  Bosch  Foundation    Germany   Stuttgart   $6.9  billion  

€4.5  billion  (EUR)   1964    

8  Robert  Wood  Johnson  Foundation  

 United  States  Princeton,  New  Jersey   $9.0  billion     1972    

28   Rockefeller  Foundation  

 United  States   New  York  City   $3.51  billion     1913    

1  Stichting  INGKA  Foundation    Netherlands  

Leiden,  Netherlands   $36.0  billion     1982    

27   The  California  Endowment  

 United  States   Los  Angeles   $3.7  billion     1996    

10  The  Church  Commissioners  for  England  

 United  Kingdom   London   $8.1  billion   £5.2  billion  (GBP)   1948    

31  The  Kresge  Foundation    United  States   Troy,  Michigan   $3.0  billion     1924    

25  The  Leona  M.  and  Harry  B.  Helmsley  Charitable  Trust  

 United  States   New  York  City   $4.1  billion     1999    

23   The  MasterCard  Foundation  

 Canada   Toronto,  Canada   $4.9  billion     2006    

19  The  Pew  Charitable  Trusts    United  States   Philadelphia   $5.6  billion     1948    

26   Tulsa  Community  Foundation  

 United  States   Tulsa,  Oklahoma   $3.8  billion     1998    

14  W.  K.  Kellogg  Foundation    United  States  

Battle  Creek,  Michigan   $7.26  billion     1930    

36

Rank   Organization   Country   Headquarters   Endowment  (USD)  

Endowment  (home  currency)   Founded    

3   Welcome  Trust    United  Kingdom   London   $22.1  billion   £14.2  billion  (GBP)  

1936    

11  William  and  Flora  Hewlett  Foundation    United  States  

Menlo  Park,  California   $7.4  billion     1967    

24   William  Penn  Foundation  

 United  States   Philadelphia   $4.4  billion      

Source: http://en.wikipedia.org/wiki/List_of_wealthiest_charitable_foundations

What is the size of moral capital in the United States? While the figures are open to

interpretation, we estimate that moral capital in the United States in the 20th century at about $5

trillion. One trillion dollars in the Universities, one trillion dollars in large foundations and one

trillion dollars in other institutions and two trillion dollars in the churches (not measured here). If

the total capital stock of the United States is around $50 trillion moral capital is about 10% in the

United States. It is certainly more than 5% and most likely not over 10% so better data and more

careful measurement might help hone the figure.

What we see here is that moral capital in the 21st century seems to be emerging as an

international force. The evidence supports our theoretical story that philanthropy is necessary for

social progress and that this form of social organization seems to be spreading around the world.

The ecosystem of moral capital provides a unique lens through which to view the emerging

globalization that is characterizing the world today. We can view this system today from six

regions of the world: North America, Europe, Asia, Africa, the MENA countries, and Latin

America. Each region approaches the currents of advanced capitalism differently, but all

participate in at least some of its currents.

37

Table 4 offers preliminary insight into the ecosystem of moral capital for seven

countries: the United States, Sweden, China, India, Saudi Arabia, Nigeria, and Brazil. We

measure the four currents of prosperity: opportunity with education; entrepreneurship with the

Global Entrepreneurship Index; wealth with the number of billionaires; and philanthropy with

the global giving rank. Of the seven countries, Sweden ranks second and China ranks fourth. It is

interesting that both countries exhibit weakness in giving relative to the other currents; in fact,

Sweden ranks below Nigeria and is almost at the level of Saudi Arabia. Perhaps Sweden’s

socialist orientation has altered the nation’s character, as it had a strong tradition of

entrepreneurship and philanthropy dating back to Alfred Nobel, who is remembered as one of the

world’s greatest philanthropists and entrepreneurs.

Today that entrepreneurial spirit is struggling to foster a startup culture, as country after

country in Europe becomes increasingly risk averse. This is particularly true of high-tech

startups: Europe has yet to produce a single Internet company valued at more than $10 billion.

Meanwhile, there are six privately owned startups in the U.S. worth $10 billion or more, and two

in Asia. Of course this affects wealth creation too, so moral capital is affected by cultural

malaise. As we see in Table 4 below, Sweden is lower in giving than in the other currents of

advanced capitalism. If the country could resurrect the spirit of an era when giving was in the

blood of the nation, the Swedish model might once again become a shining beacon that leads the

world through dangerous currents.

38

Table 4: Global Ranking of the Ecosystem of Moral Capital

Country     Innovation   Opportunity  Moral    Capital   Wealth    

Measure  GDP  (PPP)   GEI  Ranking  

Education  Rank   Volunteering  

Billionaires  Rank   Score  

United  States   $45,336   1   5   1   1   2  Sweden   $34,926   5   12   40   23   20  Saudi  Arabia   $27,346   31   34   47   29   35  China   $7,958   61   91   128   2   70  India   $3,390   104   135   69   4   78  Nigeria   $2,295   84   152   21   60   79  Brazil   $10,264   100   79   90   7   80  

 

   

• The U.S.—good ecosystem, weak on opportunity • Europe—good ecosystem, weak on moral capital and entrepreneurship • Saudi Arabia—average ecosystem, weak moral capital • China—average ecosystem, weak moral capital and entrepreneurship • Brazil—weak ecosystem, weak moral capital, opportunity, and

entrepreneurship • India—weak ecosystem, weak moral capital, opportunity, and

entrepreneurship • Nigeria—weak ecosystem, limited opportunity and moral capital

 

While global figures on moral capital are not available the global stock of capital is around $200

trillion (Economist, June 2015, p. 93). What is the size of Moral Capital in the World? If we use

the United States, as an example, 10% moral capital, then the world should have moral capital of

$20 trillion dollars. If we count non US countries we have $150 trillion dollars in capital and

moral capital should be around $15 trillion. About half of this is in the hands of the 0.01percent.

If we have 2,000 billionaires, a conservative estimate, they hold ten billion dollars each then

moral capital if given away would be at the U.S. average in the 21st century. However, actual

moral capital in the world is closer to 1.5% today. Three quarters of the global capital is outside

of the United States while three quarters of the philanthropy is inside the United States. This is

the challenge for the 21st Century.

39

Summary

We recast Piketty’s Capital in the 21st Century in light of Acs’ Why Philanthropy Matters: How

the Wealthy Give and What It Means for Our Economic Well-Being. Philanthropy matters in this

debate because philanthropy as moral capital offers an alternative solution to the Piketty

conundrum without relying exclusively on a wealth tax and government intervention. While both

socialism and philanthropy appeal to our better side, socialism is about equality in servitude and

restraint, while democracy seeks equality in opportunity. Moral capital strengthens both

advanced capitalism (innovation and entrepreneurship) and democracy (economic freedom) by

creating competition through investment in opportunity, which in turn leads to long-run

economic growth. By focusing on university research that creates a large, well-functioning

middle class (Economist, March 2015), which is necessary for technological innovation,

economic equality, and economic security, moral capital is the missing link in the theory of

capitalism development.

In these early years of the 21st century, the world is at the dawn of its rebuilding, while it

also faces two great moral challenges. The first is to figure out the institutional structure of

advanced capitalism in a globalized world—call this the great social sustainability challenge. As

Richard Florida suggests, removing trade barriers and capital flows creates efficient markets, but

the results are what economists call a zipf distribution: there are big winners and lots of losers.

Economic opportunity tends to concentrate in the hands of a few. Losers get mad. Religion or

some facsimile thereof becomes the default. People tend to think of the system as unfair. Crime

spreads and societies fragment. This is true in the developed and developing worlds. Both Marx

and Keynes knew this and suggested that institutions need to be rigged. Tax and wage policies

were suggested by Keynes and nationalization of the means of production by Marx.

40

Social sustainability has three broad solutions: get the losers above a minimum level of

mass consumption (illusions of fame trumps economics); restore order (or, as Cheney suggests,

ram it down their throats) at home and abroad; and create structures that enable the full use of the

people’s talent, self-expression, and entrepreneurship. In a nutshell, the solution is to create

opportunity for all. This is a global issue.

The second great challenge is ecological sustainability. Global warming has been at the

forefront of global discussions for years, with conflicting views and different ideological

positions in an ongoing debate. The preponderance of the evidence supports the view that

average global temperatures are rising, the polar ice caps are melting, and weather patterns are

becoming more erratic. The result will be—and already is—wide scale flooding, spreading

desserts, and increased human suffering. The various sustainability challenges are linked to one

another, thus the more we create social sustainability—opportunity for all—the easier it will be

to find solutions to our environmental problems through entrepreneurship and innovation. These

two great moral challenges, like slavery in the 19th century and the creation of the middle class

(women’s suffrage, equal opportunity, discrimination, gay rights) in the 20th century, need to be

addressed.

This paper takes a long-term view of the institutional structure of modern society, arguing

that the institutions of advanced capitalism have evolved from socialism and totalitarianism to

philanthropy and democracy, and that the key to the sustainability of the system is moral capital.

The global forces of capitalism, philanthropy, and democracy need to be woven into a global

system of opportunity and prosperity for all. The central mission of globalization is to help make

this a reality. We need to bring the cultural, natural, and institutional aspects of humanity

together to ensure that our society prospers throughout the 21st century. While many look to

41

government as the solution to our conundrum and others espouse a free market, it is philanthropy

that holds the key to our future, as it introduces both efficiency and equity into the system.

Aristotle wrote, “To give away money is an easy matter and in any man’s power. But to

decide to whom to give it, and how large and when, and for what purpose and how, is neither in

every man’s power nor an easy matter.” The success of the 21st century will be judged not at the

beginning of the century, not today, but down the road. The real question is not, “What is the

future of Capitalism?” the real question is “How will the currents of capitalism shape the 21st

century?” How will the currents of capitalism wash ashore in the next decade or two? The simple

answer to this question, Is that moral capital will continue to shape the world. Why, because that

is what human nature is about. And it is human nature that will shape the course of history.

42

References

Acemoglu, D., and Robinson, J. A. 2014. “The Rise and Decline of General Laws of Capitalism,” NBER working paper no. 20766, December 2014.

Acs, Z. J. 1984. The Changing Structure of the U.S. Economy. New York: Praeger. Acs, Z. J. 2009. “Entrepreneurial Capitalism in Capitalist Development: Toward a Synthesis of

Capitalist Development and the Economy as a Whole.” In Z. J. Acs, D. B. Audretsch, and R. Strom, eds., Entrepreneurship, Growth and Public Policy. New York: Cambridge University Press, pp. 319-338.

Acs, Z. J. 2013. Why Philanthropy Matters: How the Wealthy Give, and What It Means for Our Economic Well-Being. Princeton, NJ: Princeton University Press.

Acs, Z. J. 2015. “Philanthropy, Competition and Local Competitiveness: A Schumpeterian Conundrum,” Oxford Handbook of Local Competitiveness, David Audretsch, ed., Oxford: Oxford University Press, in press.

Acs, Z. J., and Audretsch, D. B. 1990. Innovation and Small Firms. Cambridge, MA: MIT Press. Acs, Z. J., and Braunerhjelm, P. 2005. “The Entrepreneurship Philanthropy Nexus: Implication

for Internationalization,” Management International Review 45, 111-144. Acs, Z. J., and Phillips, R. 2002. “Entrepreneurship and Philanthropy in American Capitalism,”

Small Business Economics 19, 189-204. Baumol, W. 1990. “Entrepreneurship: Productive, Unproductive and Destructive,” Journal of

Political Economy 98, no. 5, 893-921. Baumol, W., Litan, R., and Schramm, C. 2007. Good Capitalism, Bad Capitalism. New Haven:

Yale University Press. Derber, C. 2015. The Disinherited Majority: Capital Questions Piketty and Beyond. London:

Parafigen. Fukuyama, F. 1989. “The End of History?” National Interest Summer, 3-18. Haidt, J. 2012. The Righteous Mind: Why Good People Are Divided by Politics and Religion.

New York: Pantheon Books Jonathan Hopkins, 2014. “The Politics of Piketty: What Political Science can contribute to and

learn from Capital in the twenty-first Century,” The British Journal of Sociology, 65(4) 678-695.

Henrekson, M., and Sanandjai, T. 2011. “The Interaction of Entrepreneurship and Institutions,” Journal of Institutional Economics 7, no. 1, 47-75.

Hochschild, J. L. 1981. What’s Fair? America’s Beliefs about Distributive Justice. Cambridge, MA: Harvard University Press.

Lucas, C. 1994. American Higher Education: A History. New York: St. Martin’s Press. Piketty, T. 2014. Capital in the 21st Century. Cambridge, MA: Harvard University Press. Rognlie, M. 2015. “Deciphering the Fall and Rise in the Net Capital Share,” Brookings Papers

on Economic Activity, BPEA conference draft, March 19-20, 2015

43

Rudolph, F. 1990. The American College and University: A History. Athens: University of Georgia Press.

Sadeh, J., Tonin, M., and Welassopoulos, M. 2014. “Why Give Away Your Wealth? An Analysis of the Billionaire’s View,” University of Southampton, UK.

Sanandji T., and Leeson, P. T., 2013. “Billionaires,” Industrial and Corporate Change 22(1), 313-337.

Samuelson, P. 2009. “Advances of Total Factor Productivity from Entrepreneurial Innovations.” In Z. J. Acs, D. B. Audretsch, and R. Strom, eds., Entrepreneurship, Growth and Public Policy. New York: Cambridge University Press, pp. 71-78.

Schumpeter, J. A. 1937/1911. The Theory of Economic Development. Cambridge, MA: Harvard University Press.

Schumpeter, J. A. 1942. Capitalism, Socialism and Democracy. New York: Harper and Bros. Solamon, L. M. (2014). New Frontiers of Philanthropy. Oxford, UK: Oxford University Press. Soskice, D. 2014. “Capital in the Twenty-First Century: A Critique,” The British Journal of

Sociology, 65(4), 650-666. Weber, M. 1958. The Protestant Ethic and the Spirit of Capitalism, trans. Talcott Parsons. New

York: Scribner. West, D. 2014. Billionaires: Reflections on the Upper Crust. Washington, DC: Brookings

Institution Press. Wooldridge, A. (2015) The Great Disruption, The Economist, Zunz, O. 2012. Philanthropy in America: A History. Princeton, NJ: Princeton University Press.

1  See  http://en.wikipedia.org/wiki/Democracy#cite_note-­‐.  2  Marshall  is  chairman  and  chief  investment  officer  of  Marshall  Wace  LLP,  one  of  Europe’s  leading  hedge  fund  

groups.  3  Some  comments  on  moral  capital:  Assets  devoted  to  the  "production  of  higher  education"  ought  rightfully  to  be  

included  as  portions  of  moral  capital.  At  minimum,  the  long  term  assets,  or  in  particular,  the  capital  assets  are  directly  devoted  to  the  production  of  education-­‐-­‐for  the  long  term.  In  the  same  vein,  the  returns  to  university  endowment  funds,  independent  of  how  the  money  is  actually  invested,  are  utilized  to  fund  the  investments  and  other  activities  that  are  directly  related  to  the  production  of  education.  Both  of  these  long  term  investments  are  inputs  into  the  production  of  education  process  and  are  properly  included  in  moral  capital.    

  It  could  be  argued  that  short  term  assets  and  the  other  remaining  long  term  assets  of  universities  are  also  part  of  the  moral  capital.  Consider  for  example  working  capital.  If  the  university  is  to  be  productive  in  the  education  enterprise,  it  is  necessary  to  fund  the  short  term  or  day  to  day  activities  of  that  enterprise  which  means  the  working  capital  is  a  necessary  investment  in  the  enterprise.  Consider  some  of  the  other  assets:  Even  if  those  assets  are  not  directly  related  to  the  current  education  activities,  those  investments  generate  returns  which  are  used  in  the  production  of  education  process,  just  as  real  assets  are  used.  Taken  together,  the  combined  investments  in  real  assets  and  endowed  funds  are  a  lower  limit  of  any  estimate  of  moral  capital  contributed  by  universities.  Furthermore,  the  table  states  accounting  values,  which  are  likely  to  be  below  current  market  values.  Consequently,  if  we  accept  the  argument  that  ALL  assets  of  a  university  are  moral  capital,  even  the  total  assets  value  may  be  an  understatement  of  the  value  of  that  moral  capital.    

44

  The  value  of  real  estate  may  be  especially  understated  when  using  book  values  given  the  physical  location  of  

many  universities  in  urban  centres’  where  land  has  appreciated  substantially  in  value.  As  a  general  accounting  principle,  there  is  an  objective  to  state  conservative  values.    

   

     

 

 

 

 

 

 

 

 

 

 

   

W W W. E N T R E P R E N O R S K A P S F O R U M . S E